Don’t let the wrong correlation of cause and effect impact your decision-making

Causes and effects are the most often discussed topic from a personal, an organization or a government perspective.  However, often times in haste, or lesser quality analysis or other subtleties, we can get inadvertently make the wrong correlation between cause and effect.

Here are some examples: 

According to an analysis, banks found out that well-operated companies seem to borrow much more money than the less profitable companies. However, it is because a company’s financial condition is good that a bank is willing to lend money in the first place.

There is a hilarious real story that in 1990, a US laboratory reached the conclusion that spiders depend on their legs to listen. They had an experiment that they made some noises close to a spider’s legs and the spider ran away immediately. But after they cut its legs, the spider did not move.  The confusion was that without legs, their hearing was compromised. Even a child would realize that a spider cannot move without legs. 

In 1992, an American plasma physics laboratory conducted a research project about nuclear fusion. In order to convince the US government to continue to fund this project, the professor did some research and reached the conclusion that a nation uses a great amount of energy has a positive correlation with the longevity of a country. But we all know that there are many other factors that influence longevity. For example, a nation is a developed country and has better medical facilities and people can afford a healthy lifestyle, technology presents the opportunity for higher and longer economic advantage, .etc. 

The impact of false cause and effect correlation is substantial.  There are mainly two reasons why people allow this kind of bias to happen.

1. We tend to believe in previous knowledge and/or our past experience. However, in a rapidly changing era, what proved to be true in the past may not work under current circumstances. We need to be more open and allow for different possibilities.

2. We trust authority. During the French colonization, Vietnam had an infestation of rats. The French government decided to pay $$/rat to people who could kill rats. But the result was astounding that the number of rats increased because people raised rats and killed them to qualify to make money instead of catching them in the wild, which was the obvious target.

In an internet world, it’s much easier to make a false correlation between cause and effect. For example, some dishonest analysts promote that the price of a particular stock will increase the next day to 5,000 people and send another email saying that the price will decrease to another 5,000 people.  They continue to do the same for other stocks.

In the end, there will be a small group of people who would see the results are always correct. These people will trust that the organization can accurately predict the stock movement and may give these dishonest analysts, who are engaged in illegal activity, their hard earned money. Once the criminals receive the money, they will disappear.